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The Technology and Life Sciences Industry and Revenue Recognition

Written on August 14, 2018

Below are a few points concerning potential impacts of the new revenue recognition standard (ASC 606) on the technology and life sciences industry. The information presented here does not represent a comprehensive assessment of the outcome of applying the new standard, but these points may help when considering how ASC 606 could impact you.

TECHNOLOGY AND LIFE SCIENCES REVENUE RECOGNITION

Issue: Reseller and distributor arrangements

Step(s) within the Five-Step Model: Scope 1, 5

Description and Examples: Arrangements to sell goods and/or services through resellers or distributors need to be evaluated to determine when control transfers to the customer (i.e., reseller/distributor); revenue should be recognized at that point. The “sell through” method under prior GAAP may not be appropriate. Also consider contract combination and modification guidance (e.g., multiple contracts entered with different regions of an organization at or near the same time may need to be combined).

Issue: Identifying performance obligations and related revenue recognition (i.e., over time or point in time)

Step(s) within the Five-Step Model: 2, 5

Description and Examples: Entities must evaluate all of the promises in a contract to determine whether they meet the definition of “distinct”. Each distinct promise must be accounted for as a separate performance obligation, each with its own pattern of revenue recognition.

Description and Examples: Entities must estimate variable consideration, apply the constraint on variable consideration and update estimates each reporting period. Entities that license intellectual property must also consider the exception to the constraint related to royalties and usage-based fees. This could be a change for entities that did not make estimates because the variable consideration was not considered to be fixed or determinable until the uncertainty was resolved. Examples include milestone payments, royalties and usage-based fees, volume discounts, etc.

Issue: Significant financing component (extended payment terms)

Step(s) within the Five-Step Model: 3

Description and Examples: Revenue may need to be adjusted for time value of money if the timing of payments provides the customer or the entity with a significant benefit of financing the transfer of goods or services. This may be a change in practice for many entities.

Description and Examples: Vendor specific objective evidence is no longer a barrier to recognition of license revenue. There is no contingent revenue cap under the new revenue standard. This is a change from prior GAAP, which limited the amount allocable to a delivered item to the amount that is not contingent on the delivery of additional units or meeting other specified performance criteria.

Technology and life sciences revenue recognition and the implications of the new standard can be complicated to navigate. Please consult your Warren Averett advisor for more information specific to your business and technology and life sciences revenue recognition.